The average house price fell by 0.5% in the three months to the end of July, despite recovering over the month, according to government figures released today.

The communities and local government department said the average property cost £217,171 in July, a slight increase on June's average price of £215,029. This slowed the quarterly rate of price falls - in the three-months leading to April the housing market saw a drop of 1.3%.

Overall, house prices were 0.3% lower in July than in the same month last year - a fraction of the falls reported by mortgage lenders. Both Halifax and Nationwide have reported double digit house price falls over the past 12 months.

A spokesman from the DCLG said: "When looking at trends in the market it is important to remember that UK house prices are significantly higher than five years ago."

According to the department, prices in July were 40.9% higher than five years ago.

"The current issue affecting the market is largely about the supply of credit - a very different situation to the early 90s, which was about high interest rates and unemployment. The fundamentals underpinning the market remain sound with long-term demand for housing, low interest rates, and low unemployment," the spokesman added.

However, Howard Archer, chief UK economist at Global Insight, said there was continued "downward pressure" on the market, stemming from "extremely weak market activity, stretched buyer affordability and tight lending conditions."

Archer said: "Consequently, it seems odds-on that house prices will head downwards for some considerable time to come, particularly as lending conditions could well tighten further in the near term, at least amid the current turmoil caused by the collapse of Lehman Brothers.

"Very negative housing market sentiment heightens the risk that house prices will continue to fall sharply for some time to come. In addition, unemployment is now rising at an accelerating rate, which increases the likelihood that people will have to sell their house for 'distressed' reasons. This would lead to more houses coming on to the market and would be liable to depress prices."

Archer predicted house prices would fall by 15% in 2008 and 12% in 2009. "Consequently, house prices are seen to be falling 26% in nominal terms from their August 2007 peak of £199,612 on the Halifax measure to stand at £147,478 at the end of 2009," he warned.